January 28, 2019

No Down Payment Car Loans: Are They Available?

You don't need money to buy a car. That sounds like a bit of an oxymoron, but it's true. Some people can buy a car with no down payment. Is it ideal? It depends on the situation, but it's definitely a possibility for some borrowers.

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A car is a necessity, so you'll probably do anything necessary to get yourself one. If one way is to get a loan with no money down, you may jump at the chance. Are they worth it? They could be; it depends on your circumstances.

Keep reading to help you determine if going the no down payment route is right for you.

What Is a No Down Payment Car Loan?

As the name suggests, a no down payment car loan is an auto loan that doesn't require any money upfront. You borrow the full cost of the car and start making payments on that amount shortly after driving the car off the lot.

Today there are many lenders and auto dealers advertising the no down payment option. What they don't tell you is that they are for borrowers with "great" credit and stable employment.

At this point, you're probably discouraged. Why would someone with great credit need this option in the first place?

Just because a borrower has great credit doesn't mean that they have a lot of money. It just means that they pay their bills on time. It also means that they haven't overextended their credit.

In other words, they are probably financially responsible. Lenders and car dealers reward these types of consumers with no down payment car loans.

Is It Better to Make a Large Down Payment on a Car?
No down payment sounds nice, but in the end it may cost you more money.

You'll typically pay a higher interest rate and pay interest on a larger balance. Worse yet, you may end up "upside down" on your loan, especially if you buy a new car. The first month you drive the car, you can lose as much as 10% in depreciation.

If you make a large down payment, you lower the amount of money you borrow. This means that you'll pay less interest over the life of the loan. Better yet, lenders or car dealerships will likely give you a lower interest rate because of the lower risk of default. When you have your own money invested, you tend to do what you can to make your payments on time. You may also decrease the risk of landing upside down on your loan.

What Credit Score Do You Need for a No Down Payment Loan?

Every lender will have a different answer to this question, but on average, you can expect lenders to require at least a 680 credit score if you don't want to make a down payment. Any credit score below 680 and you may need a "subprime loan."

Lenders offer "subprime loans" to borrowers who have lower credit scores or other risky factors that make them a high-risk borrower.

Typically, subprime lenders require borrowers to make some type of down payment. It gives the lender a little reassurance that you will stay current with your loan or you risk losing your own money.

You can expect these types of loans to have higher interest rates and more costs involved.

Is It Better to Make a Large Down Payment on a Car?
Getting away without putting money down on a car may seem like a dream come true. You don't have to shell out thousands of dollars, yet you drive away in your dream car. What you also drive away with, though, is a higher interest rate, larger monthly payment, and no equity in your car.

Let's look at the worst-case scenario here. What if you were in an accident that totaled your car just six months after owning it? Because you didn't put any money down on the car, you will likely already be upside down on the loan. This means you'll owe more than the insurance company might pay you for the accident. Making some type of down payment (especially a large one) is typically in your best interest.

Can You Get a Car with Bad Credit and No Money Down?

What happens if you don't have that illustrious 680 credit score and you don't have money to put down on the car? Are you out of luck?

It won't be easy, but you may find lenders willing to give you a car with no down payment despite your bad credit. You'll have to be willing to make other qualifying factors look good to the lender, though. In other words, you need to give them a reason to want to give you a loan.

Stop and think why you have bad credit. Are they old bills that you didn't pay that are haunting you? Did you make good on them, but they are just hanging out on your credit report? Have you overcome those issues since then? You'll need to provide proof to the dealer/lender.

Show lenders that you have ample monthly income to cover the car payment and your current debts.

If you've recently gotten a raise or you took on a second job, make that known. Also, make any credit dated after the "incident" good credit. Show lenders that you are financially responsible and are just trying to overcome the reputation that your mistakes have created for you.

If you're looking at a car loan, it's important that you don't open any new credit lines or overextend your current credit lines.

Lenders want what they call "compensating factors," or other factors that make your application look acceptable. For example, if you have a low credit score, no down payment, and a sloppy job history, you don't give the lender anything positive to use.

If, on the other hand, you have a low credit score and no down payment, but you have increased your income, made all of your payments on time over the last year, and you have a car to trade in, you may have a better chance of approval.

It's crucial that you shop around when you look for a no down payment car loan.
Because the terms may not be the best in the industry, you'll want to make sure you have the best loan for you.

Try to obtain quotes from at least three lenders within a few week's timespan. Your credit score will only be hit for one inquiry since the inquiries are for the same type of loan. You have to be quick about it, though. Once you have offers from several lenders, compare them to one another. Use the lowest offer to negotiate with other lenders to see if they can beat what the lender with the lowest offer was willing to provide.

Can You Use Your Trade-in as a Down Payment on a New Car?

A down payment doesn't have to mean cash. If you have a car that has value (even if it's $1,000), it counts as a down payment.

It's a good idea to have a number in your head before you head to the dealership. Using the internet, you can get a ballpark figure for your car's market value. Sites like Kelley Blue Book or Edmunds offer a simple tool to help you determine an estimated value for your car.

The car dealer probably won't come back at you with a value that matches what you found. However, you can use the value you have in mind as your tool for negotiation. In other words, don't accept what the dealer offers right off the bat. Instead, negotiate so that you get the maximum amount for your trade-in, aka your down payment.

Can You Get a No Down Payment Car Loan on a Used Car?
It may be possible to find a dealer willing to give you a car loan with no down payment on a used car, but it's not very likely. Used cars already have higher APRs. If you don't make a down payment on top of that, you are looking at a hefty car payment that may not make owning a used car worth it.

Things You Should Know About a No Down Payment Car Loan

If you decide to take the no down payment car loan, make sure you are aware of the following:

  • You won't have any equity in the car. Depending on the loan terms you take, it could take a while for you to be "right side up" on your loan. If you plan to sell the car in the near future, you may find that it will cost you to sell it.

  • You may pay a higher APR. Lenders base your APR on the riskiness of your loan. Not making a down payment makes the loan risky. Pay close attention to the APR and how much the loan will cost you over its lifetime to make sure it's worth it.

  • Even a small down payment can help. Even if you think the money you have saved is so small that it won't matter, put it down on the car. It will help decrease your loan payments, even if it's just a little bit.

Bottom Line

There is a time and place for the no down payment car loan, but it isn't for everyone. If you have the money to put down on a car, use it. If you don't and you need a car now, you may no choice but to take the no money down loan. Make sure you pay close attention to the terms and do your best to pay the loan off even faster than required to minimize the interest costs.

Write to Kim P at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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